OTTAWA—While the Bank of Canada likely raised interest rates more than consensus expectations, it clearly signalled that the Dec. 7 increase of 50 basis points—half a percentage point—may be the last of its current rate-hiking cycle, according to analysts.
The central bank’s policy interest rate is now 4.25 percent, but language about future interest rate increases has been tweaked from October’s statement to suggest less certainty about the need for more rate hikes.
“Governing Council will be considering whether the policy interest rate needs to rise further,” said the BoC. This is changed from its Oct. 26 statement, which said that “Governing Council expects that the policy interest rate will need to rise further.”
“It certainly is a definite softening of their tone,” Steve Ambler, economics professor at Université du Québec à Montréal (retired), told The Epoch Times.
Tony Stillo, director of Canada Economics for Oxford Economics, says the bank’s policy rate has hit its peak for this rate-hiking cycle.
“Today’s statement marks a clear shift in the bank’s communication,” he said in a Dec. 7 note.
RBC senior economist Josh Nye said, “That clearly opens the door to a pause as soon as the next meeting in January, and in our view frames that decision as between 0 and 25 bps.”
Nye said the consensus was almost evenly split between a 25-basis-point and a 50-basis-point increase, though pricing in financial markets was leaning toward 25.
Positives and Negatives
The biggest impact of the BoC’s rate hikes since March, amounting to a total of 4 percent, has arguably been in the housing market, and concerns of an economic recession have been mounting.
Mortgage renewal is a concern for many Canadians who face the prospects of much higher fixed rates than they saw five years ago. But Ambler says variable-rate mortgages may warrant consideration.
“Not only is the tightening cycle maybe at an end, maybe the bank will be able to start cutting rates a little bit quicker than people are expecting,” Ambler said.
“if I had to renew at this point, I would probably take variable over fixed-rate.”
He adds that, if the end of rate hikes is in sight, it may make for a slightly more favourable business investment climate, which could help the economy avoid a recession.
While the BoC noted that third-quarter economic growth was stronger than expected, it reported that data since its last quarterly forecasts in October confirmed its outlook that “growth will essentially stall through the end of this year and the first half of next year.”
Growth is softening but the labour market is still red hot, with near record-low unemployment and high job vacancies—which should foster some long discussions among central bankers, Ambler says.
“We’re just in such unusual times that you can have actually weak real growth and a fairly tight labour market and all sorts of seemingly contradictory things are going on.”
Wage growth has yet to show signs of slowing—remaining above 5 percent for the sixth straight month. But purchasing power continues to erode since prices are rising faster than wages.
BMO strategist Benjamin Reitzes said in a Nov. 29 research note that despite Canadian economic growth of 2.9 percent in the third quarter—nearly double expectations—the headline figure “masks underlying softness.” In particular, household spending fell 1 percent in the quarter.
RBC pointed to September and October growth being “much softer” than during the summer.
“The economy is likely already in the early stages of recession, and we forecast a 2.3 percent peak-to-trough decline in GDP [gross domestic product] by Q3 2023,” Stillo said.
Two Stories of Inflation
Inflation is telling two different stories depending on whether the focus is year-over-year figures or figures looking back at the last three months.
Consumer price inflation has held steady at 6.9 percent for the past two months. This is down from a peak of 8.1 percent for June. However, the BoC’s estimates of core inflation, which exclude more volatile items, have not come down nearly as much on an annual basis.
There’s a lot of inertia in the headline inflation number, but core measures over the last three months have come down substantially, Ambler says. Year-over-year numbers include things happening over six months ago, he added.
In calculations provided to The Epoch Times, Ambler showed that a couple of the BoC’s measures of core inflation over the last three months are in the 3.3 to 3.4 percent range, whereas they were 5.2 to 5.6 percent range just three months prior.
In guiding the BoC’s monetary policy, Ambler said “the bank should be looking at more forward-looking numbers that don’t have this built-in inertia.”
The central bank said on Oct. 26 that it projected inflation to come down to the 2 percent target by the end of 2024.
